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Guarantee in commercial contract
December 3, 2020
Guarantee in commercial contract
            We’ve gotten a couple questions regarding the 2nd signature line on the Commercial All in One agreement with the “personally guarantees Subscriber’s performance.” Signers are asking if it means they are personally liable and are hesitant to sign. Can you tell us how to explain this signature line to the client?
  Thank you
            Since almost all businesses are set up as corporations or LLCs, legal entities other than an individual, the Standard Form commercial agreements are designed to be signed by the legal entity [the corporation] and guaranteed by an individual, usually an owner of the legal entity. The alarm contract creates a legal binding contractual agreement between the parties.  One characteristic of using a legal entity to conduct business is to avoid personal liability for contractual obligations on behalf of the legal entity.  One way to create personal exposure to personal liability for contract debt is to get a personal guarantee.
            It’s not surprising that an owner would resist a personal guarantee.  One reason for using a legal entity was to avoid personal liability.  
            You want to know how to explain the personal guarantee to your subscriber to encourage getting the owner to sign the personal guarantee.  I can think of two things to say, though most likely only one will get you the guarantee.
  *  You are making a substantial investment in the installation or the take-over of the alarm [or other] system.  The subscriber’s financial situation is unknown to you; you consider the risk in getting involved.  For example, are you going to install a $100,000 fire alarm system and hope to get paid when done?  Maybe the customer is a major hospital if it’s a start up restaurant, maybe not.  Maybe the owner tells you how successful he is; great.  That’s when you ask for the guarantee, because you are relying on his finances, not the legal entity’s finances.  Small businesses often depend on the finances of their owners, and owners are more likely to make sure creditors get paid if there is a personal liability attached to the contract debt.
  * The owner certainly has reason to challenge the personal guarantee.  In law school the definition of someone who gave a personal guarantee [a guarantor] was “an idiot with a fountain pen”.  You probably don’t want to explain it this way.
            The Commercial All in One is binding on the legal entity once the contract is signed; the personal guarantee is not necessary.  If you are not concerned with the legal entities ability to pay you then you don’t need the personal guarantee.         

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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301